A Time for Tontines

MANY young Americans don’t have health insurance, and not necessarily because they can’t afford it. Some just don’t want to invest good money in health care that they may never need. This creates tremendous burdens for the individuals who do end up having medical problems, as well as for the taxpayers who cover their visits to the emergency room. Around a third of all uninsured adults below retirement age in the United States are 19 to 29 years old. How can we get insurance to reach these young “invincibles”?

Creating universal health insurance or forcing businesses to insure their employees’ grown children are costly solutions. Much better would be to design a product that these young invincibles would be willing to pay for. We suggest an old solution: the tontine, which is health insurance that pays a cash bonus to those who are ultimately right in their belief that they did not really need insurance.

Here’s how it would work. In the simplest arrangement, insurance companies would award the bonus to policy holders whose health care costs were below a certain level over five years, excluding preventive care. The program must be designed so that participants don’t forgo truly needed care in order to stay eligible for the bonus. If a participant fell ill during a five-year period, for example, they could still lock in a bonus for the years in which they were healthy. There could be very low co-payments for office visits and tests, and participants might have to follow their doctor’s advice to remain eligible for the bonus.

Sadly, this kind of insurance isn’t on the table, due to the failure of tontine life insurance in the late 19th century (“tontine,” by the way, derives from the name of the Italian banker who invented the system). Tontine life insurance paid a deferred dividend to policy holders who survived and faithfully paid their insurance premiums for a defined period, usually 20 years.

Things went sour when tontine life insurance companies became economic titans, buying and selling stocks on a scale that would make Warren Buffett blush. Unfortunately their leaders did not show Mr. Buffett’s personal restraint. Their extravagance and influence-peddling prompted a political backlash that led to laws in 1906 reorganizing the insurance business and regulating its management of surplus funds.

The life insurance tontine experience seem to make health insurers leery of trying such an experiment again. But they shouldn’t be. Health insurance tontines would not produce the same level of corrupting fortunes. Young people don’t have as much money to pour into health tontines as the older people who bought the life tontines. Furthermore, insurers would build up the funds for the bonuses over only five years, as opposed to 20.

There are of course many reasons why everyone should buy insurance. But those reasons don’t appeal to the young invincibles, with their exaggerated optimism about their health. The beauty of the tontine feature is that it frames the health insurance purchase as a smart investment rather than a way to spend money for something the customer doesn’t think he needs. While 19th-century insurers may have made some poor choices, they understood aspects of human nature that today’s industry seems to have forgotten.

Tom Baker, a professor at the University of Pennsylvania Law School, is the author of “The Medical Malpractice Myth.” Peter Siegelman is a professor at the University of Connecticut School of Law.

A version of this op-ed appears in print on , on page A23 of the New York edition with the headline: A Time for Tontines. Today's Paper|Subscribe